Apple, Huawei, and the Trade War With China

Will politics dictate whether American tech companies can benefit fairly from the Chinese market, and whether China's tech giants can compete here?

Stay Connected

A month ago, Chinese state television aired an investigation of Apple's (NASDAQ:AAPL) warranty policy, claiming that it discriminates against customers in China. Celebrities and public figures took to the nation's social media to denounce the company. The result, as we know, was farcical: One of these denunciations contained what appeared to be instructions for when it should be posted, leading to allegations that the network had orchestrated a smear campaign. Despite this misstep, and an apology by Apple, the attacks continued.

Xinhua ran an article blaming the company for student debt. More recently, the People's Daily – another state-owned publication – accused it of violating the country's pornography laws; and then, in an apparent victory lap, the paper released a survey showing that public opinion of Apple had fallen.

Let's call it tabloid protectionism, and be grateful for it. When Congress pulled a similar stunt last fall, the performance wasn't as entertaining.

In October, the House Intelligence Committee released a report on two Chinese telecom firms -- Huawei (SHE:002502) and ZTE (SZSE:000063) -- that effectively banned them from selling network equipment on US soil. It was the continuation of a spat that began in 2010, when the Commerce department stepped in to kill a potential deal between Huawei and Sprint Nextel (NYSE:S). The report contained a great deal of rhetoric regarding national security concerns, but no evidence -- and evidently, none was needed. CBS (NYSE:CBS) ran a torches-and-pitchforks 60 Minutes segment about Huawei, and anyone watching might have been fooled into thinking that the company had done something wrong.

Retaliation came less than a month after Congress released its report, when China Unicom (NYSE:CHU) announced that it was replacing Cisco (NASDAQ:CSCO) in one of its backbone networks, citing "security reasons." Huawei, meanwhile, has refocused itself as a smartphone manufacturer with its sights set on Apple and Samsung (KRX:005935). It will likely benefit from China's media campaign against the iPhone-maker – and perhaps that's the whole point.

These events take place in atmosphere of growing tension between China and the US. Congress has now passed legislation banning the use of Chinese IT by federal agencies. The Obama administration is taking a more aggressive stance on Chinese hacking and cyberspying, and the so-called "Asia Pivot" -- a shift in foreign policy away from the Middle East, towards Asia – is being interpreted overseas as an attempt to check China's influence. At the same time, the US is leading talks regarding the Trans-Pacific Partnership, a trade treaty involving the Asia-Pacific region and the Americas. China wasn't invited. In response, Beijing launched discussions for a rival trade agreement, the Regional Comprehensive Economic Partnership. The rest of Asia is being presented with a stark choice: them or us.

More generally, high unemployment in Western nations has left them less willing to tolerate the subsidies -- seen and unseen -- with which China aids its exporters. Movements like "onshoring," pushed by the Obama administration, have gained steam as jobs market remains anemic. China, on the other hand, is facing an economic rebalancing, away from exports and towards favor of personal consumption. That means a smaller foreign market and a larger domestic one. The Communist Party has a vested interest -- politically, and in many cases, financially -- in ensuring that this increasingly important home market is won by Chinese companies.

The charges against Huawei and Apple are absurd, not because they're unfounded, but because they could apply to any global company. China may be a cyber threat, but Cisco's supply chain is no less Chinese than Huawei's. Apple's app store contains hundreds of thousands of apps, so while it's conceivable -- and probably unavoidable -- that one them might fit a censor's definition of pornography, it was Steve Jobs who famously suggested that "folks who want porn buy an Android." Was Huawei singled out because it hired the wrong lobbyists? Did Apple run afoul of the Communist Party?

Interesting questions -- for their similarity, if nothing else -- but another possibility is that these companies were simply in the wrong place at the wrong time. Regardless, there's something significant in the fact that two such important companies were targeted in the first place. Apple is (or was) the most valuable company in the world, a symbol of American innovation, and a popular brand in China. Huawei is also a big deal; it's one of China's great success stories, and perhaps the Chinese firm with the greatest chance of becoming a global name.

The dichotomy here is that, as tensions heat up between the US and China, American businesses are increasingly likely to plan their futures around the enormous Chinese market. Some, like Cisco, have invested billions of dollars overseas. It may be politics – not economics – that decides the fate of those investments.